Founder Anti-Dilution Clause
We are 3 founding partners in an early stage start up. We are all good friends, and just started to negotiate an equity agreement. Our goal is to be fair, but also be fundable, as we will be needing capital.
- Founder #1: Non-technical, brings the idea, will be working full time and has done most of the design and work thus far.
- Founder #2: Non-technical, will be coming on full time if we receive funding. He is also willing to put as much as $4,000 to $5,000 into the company, and has spent many hours working on this with me.
- Founder #3: Semi technical, has also spent many hours working on the idea, but not as many as Fdr#1 or Fdr#2. He is also willing to invest $4,000 to $5,000. He also made the initial investments in the domain names and network hosting, funded a trial membership for a service we had previously used, was a big part of the original idea…even though it has morphed into something else, and brought the initial understanding of web development and hosting to the group. He also has executive experience. This founder lives out of state, so it is unclear as of now what his future contribution will be, and he will probably not be coming on full time. We are working on what his contribution will be.
Keep in mind that we are also working on finding a CTO that we will offer a co-founders position to.
Founder #3 has also requested an anti-dilution clause that will not allow his stock to dilute less than 5%. So if he had a 15% equity share, his stock would not dilute any further then 5%.
Is the anti-dilution clause something we should consider?
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Derek, I removed your question about equity split because that has already been answered thoroughly here: http://www.brightjourney.com/q/forming-new-software-startup-allocate-ownership-fairly. – Zuly Gonzalez 12 years ago
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Why not just agree to equitable dilution? – Tim J 12 years ago
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Zuly, I disagree with you removing my question. I do understand, it has been answered several times. However, every case is different. My co-founders and I were looking for specific help on this. As we are in a somewhat different situation. We are all very good friends, and started this thing together. The problem is one of us lives out of state, and because of this he just wont be able to contribute as much. So were trying to find the best way to do this so that it still benefits us all. If someone one is gracious enough to help with an answer, let them. I think it only helps the site. – Derek 12 years ago
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Derek, please note that it is considered bad form on this site to ask multiple questions in one post. I'm sure you'll find plenty of questions that disobey that guideline, but we do our best to educate new users about this through comments and edits. Second, you're correct, every case is different. However, we cannot possibly entertain every possible permutation of an equity question. There are just too many variables and it's not something that scales well. In addition, they risk being too localized. As it is we already have too many equity questions and close a lot of them. – Zuly Gonzalez 12 years ago
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We can't make that decision for you. Your team has to sit done and make a decision among yourselves. What we can do is provide general guidance on the subject, and that's what Joel's answer is there for. The fact that you have a founder that won't be able to contribute as much is nothing new, and it is something that has already been discussed on this site. The fact that you are all friends is not unique either. You may also want to take a look at this question: http://www.brightjourney.com/q/divide-companys-equity. – Zuly Gonzalez 12 years ago
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The problem is...by taking out that one sentence, the whole post no longer makes any sense! :) Its ok...I DO understand what you guys are trying to do here, whether I agree how you do it or not. The fact is, Onstartups is a great site, and it has helped me, and others like me, tremendously. The people here have been extremely helpful and I couldn't be more appreciative. – Derek 12 years ago
2 Answers
Please see Joel's excellent answer here: Forming a new software startup, how do I allocate ownership fairly? I don't see why anybody should get anti-dilution in your case. The few times I see it, it's usually when the company is started using university IP, and the university gets a small undiluted stake (2% - 5%) as partial consideration for the IP. Anti-dilution, basically, says that the stockholder gets a small cut of every future fundraising. It's unclear from your description why the founder deserves that. If he's going to be contributing to the ongoing success of the company, then grant him stock that vests over time.
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Thanks Chris! Joels post is a great one. We are kind of looking for some specific help on this. As my co-founders and I are all very good friends, and we started this thing together. However, one of them lives out of state and just will not be able to contribute as much. So we are trying to find a way that benefits us all...yet is fair. I want everyone to feel that they are getting there fair share. – Derek 12 years ago
Derek - I'd think twice (no three times) before agreeing to any anti-dilution clauses. Beyond making your org non-fundable to angels / vc's, everyone else takes a penalty dilution hit.
Here's an interesting discussion to review.
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@jimg...that was great reading. Thank you for posting. Once again...it is very appreciated. – Derek 12 years ago
